Handling Return Checks "Expeditiously"

Handling Return Checks “Expeditiously”

The first area we want to explore is the returning bank’s duty to handle return checks expeditiously. There are many similarities here to a paying bank’s duties to handle return checks expeditiously, so if you mastered that section of this chapter, you should not have any difficulty with this one. There are, however, some significant differences.

[Commentary, 12 CFR 229.31(a)-2]

If your bank is in the business of returning checks for other banks and you agree to do so expeditiously by doing any of these three things, then you must meet the expeditious-return requirements of Subpart C. (The expeditious return requirements do not, however, apply to a check drawn upon the United States Treasury, to a U.S. Postal Service money order, or to a check drawn on a state or a unit of general local government that is not payable through or at a bank.) For returning banks as for paying banks, there are two alternative ways to do that: (1) the two-day/four-day test; and (2) the forward-collection test.

The “Two-day/Four-day” Test

[12 CFR 229.31(a)(1)]

As under the two-day/four-day test for paying banks, the key here is that the check must be sent so that it would “normally result in its being received” within the time frames. Actual receipt may be later if unforeseen delays occur. Also, if the last day of either the two-day period or the four-day period is not a banking day for the depositary bank, you can send the check such that it will be received on the next banking day of the depositary bank. [12 CFR 229.31(a)]

Although you will not know in most cases exactly when a return check was presented to the paying bank, you can agree with the banks from which you accept return checks as to liability for delays caused by them and by you. [Commentary, 12 CFR 229.31(a)-3]

You can send the check either directly to the depositary bank or to another returning bank that agrees to handle the check expeditiously. [12 CFR 229.31(a)] Remember, a returning bank “agrees” to handle a check expeditiously if it does any one of the three things we listed at the beginning of this section.

The Forward-collection Test

Under this test, a returning bank returns the check expeditiously if it sends it by the same means that a similarly situated bank would send for forward collection a check of a similar amount drawn on the depositary bank and received by the similarly situated bank at the same time as the returning bank received the return check. [12 CFR 229.31(a)(2)]

A “similarly situated” bank, as under the forward-collection test for paying banks, is one of similar asset size, located in your community, and which handles a similar volume of checks for forward collection as you do. [Commentary, 12 CFR 229.31(a)-4a] The idea is to require returning banks to handle return checks as quickly as similar banks in the community handle forward-collection checks. Be aware, however, that you are permitted to have an earlier cutoff time for return checks than for forward-collection checks, although the cutoff time cannot be earlier than 2 P.M. [12 CFR 229.31(a)(2)(iii)] This means, for example, that if you have a 2 P.M. cutoff time for return checks and a 4 P.M. cutoff time for forward-collection checks, a return check received at 3 P.M. would be treated as received on the next banking day, whereas a forward-collection check would be treated as received on the day of actual receipt. A forward-collection check received at 3 P.M. might be processed more quickly because of the difference in cutoff times, but this fact by itself does not mean your handling of the return check did not meet the forward-collection test.

You can send the check either directly to the depositary bank or to another returning bank. If you send it to a returning bank, that bank must agree to handle the check expeditiously in order for you to have met the forward-collection test. [12 CFR 229.31(a)] We listed above the ways in which a returning bank agrees to handle checks expeditiously.

If you are relying on the forward-collection test to meet the expeditious-return requirement, Regulation CC gives you the option of converting the check into what is called a “qualified return check,” or QRC. [12 CFR 229.31(a)] We looked at these briefly under the paying bank section. QRCs are checks which have been prepared for automated return by enclosing them in a check carrier with MICR encoding or putting a strip with MICR encoding on the check. The MICR encoding must have the routing number of the depositary bank, the amount of the returned check, and a “2” (or a “5” in the case of a substitute check) in position 44 of the MICR line as a return identifier. We saw earlier that paying banks do not get any extra time for converting a check into a QRC. But returning banks that are relying on the forward-collection test do. [12 CFR 229.31(a)]

Specifically, the deadline under the forward-collection test and under the midnight- deadline rule of the Uniform Commercial Code and Regulation J are extended by one business day if you convert the check into a QRC. [12 CFR 229.31(a)] However, if you are sending the return check directly to the depositary bank, this extra business day is not available since the conversion in that case does not speed up the delivery of the check. [12 CFR 229.31(a)] The added efficiency of a QRC exists only if the check goes through another returning bank on its way to the depositary bank. And, converting the check to a QRC does not have any effect on the two-day/four-day test. You are given no extra time for having converted a check to a QRC under that test. [12 CFR 229.31(a)]